How to become a millionaire by retirement

Almost anyone can become a millionaire if they make a commitment to save early in their career and stick with it over several decades. Savvy investors will be helped along by employer contributions and tax breaks and will skillfully avoid high fees that reduce investment returns. Here's how to save $1 million in time for retirement.

Start saving at an early age. If you start saving for retirement at age 25 and save $4,830 per year, or about $400 per month, and earn 7 percent annual investment returns, you will accumulate just over $1 million by age 65. If you wait until age 35 to start saving, you'll need to save over $10,000 per year to hit $1 million by 65, assuming the same investment returns. "For every 10 years that you delay, there is going to be a significant increase in the amount you have to save," says Danna Jacobs, a certified financial planner and founding partner of Legacy Care Wealth inJersey City, New Jersey. "You are missing out not only on the contributions but on the compounding interest."

Capture employer contributions. If your employer provides a 401(k) match, you can get by saving a little less and still hit $1 million by retirement. A worker who starts saving at 25 and gets a $1,500 annual match could save $1 million by age 65 by tucking away as little as $3,330 per year. A worker who starts saving at 35 and gets the same match would need to tuck away $8,705 annually to hit $1 million by retirement.

However, job changers need to be careful that they get to keep the match. Many companies have vesting schedules that prohibit departing employees from taking the match with them until they work for the firm for a specific number of years, or they allow workers to keep a portion of the match based on their years of service. "Usually you do have to be with your employer for a certain number of years, and sometimes you do leave your employer contributions on the table," Jacobs says. "If it's a sizable amount, a lot of times you can negotiate for a sign-on bonus with your new employer to try to compensate you for those unvested amounts."

Save money on taxes. You can also use tax breaks to grow your money faster. If you put $5,000 in a 401(k) and you are in the 25 percent tax bracket, you will save $1,250 on your tax bill. Income tax won't be due on your contribution until you withdraw it from the account. "When you put the money in the 401(k), it reduces the amount of income you have, so it's less tax you are paying at the end of the year," says Anjali Jariwala, a certified financial planner for FIT Advisors in Chicago. "The savings that you get from being able to defer that income is huge."

However, it's important to note that you will need to accumulate more than $1 million in a retirement account to have a million dollars to spend in retirement because you still need to pay income tax on each distribution. But if you save $1 million in an after-tax Roth IRA, no income tax is typically due on distributions in retirement.

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Avoid high-cost funds. Your investments will grow faster if you minimize the fees that are deducted from your returns. If you save for 40 years between ages 25 and 65, but a 1 percent annual fee reduces your returns from 7 percent to 6 percent, you will need to save about $6,260 per year to reach $1 million by retirement, instead of $4,830 per year without the extra 1 percent fee. "You want to be really mindful of costs when it comes to investing," Jariwalasays. "Try to get to an allocation you want for the lowest cost possible."

Watch out for penalties. Don't let retirement account penalties reduce your retirement savings. There's a 10 percent early withdrawal penalty if you take money out of a traditional IRA before age 59 1/2 and a 50 percent penalty if you fail to start taking traditional IRA withdrawals after age 70 1/2. Also watch out for taxes and penalties when rolling money over from a 401(k) to an IRA or new 401(k) when you change jobs. "Create an IRA, and each time you leave a job, do a direct rollover," says Michael Powsner, a certified financial planner and founder of Upstart Wealth Management in San Francisco. "Make sure you deposit the funds in the IRA in a timely manner from the time the 401(k) cuts the check."

Don't plan on a lavish retirement. While becoming a millionaire seems like a worthy retirement goal, the money is only likely to produce a modest retirement income when spread over several decades of retirement. If you draw down 4 percent per year, this nest egg will produce about $40,000 of retirement income per year. When combined with Social Security income, $1 million in savings could produce a comfortable retirement lifestyle in some parts of the country, but in high-cost cities it might not be enough. "You're not going to be able to live in New York City or San Francisco on that type of income," Powsner says.